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Stocks inched higher last week, and investors took on a little more risk as small-cap stocks sharply outperformed big-cap shares in quiet trading.

Despite the mini-rally, there were notable reversals during the week, driven by conflicting remarks spilling out of high-level politicians in Washington. To some market observers, it seemed as if every trader's eyes went to the TV as soon as any D.C. politico opened his or her mouth.

Comments from Republican Speaker of the House John Boehner offered a prime example of the D.C. factor. Wednesday, he said he was optimistic about the fiscal-cliff negotiations, but on Friday he referred to a "stalemate." Both times he managed to change the direction of the market intraday. Investors hung on every word.

"It's a headline-driven market," says Andrew Ahrens, CEO of Ahrens Investment Partners. "The fiscal cliff is the only thing investors are interested in." He likens it to the kids' game of tag. "People keep their hand on the base," taking it off when one politician speaks hopefully but putting it right back when another seems doubtful about a fiscal-cliff agreement.

Last week, the Dow edged up 16 points, or 0.1%, to finish at 13,025.58, while the Standard & Poor's 500 index added seven points, or 0.5%, to 1416.18. The Nasdaq Composite rose 43 points, or 1.5%, to 3010.24. The small-cap Russell 2000 jumped 15 points or nearly 2%, to 821.92.

"Despite a nice rally over the past two weeks," says Andre Jude Bakhos, director of market analytics at Lek Securities, a heightened sensitivity to headlines will undermine investor confidence as things unfold in the capital ahead of the Dec. 31 fiscal-cliff deadline.

"The market has a feel that a fiscal-cliff deal is priced in," he says. "Until something tangible comes out on the fiscal cliff, we are going to have a choppy market."

"People are looking for direction," adds Brian Belski, the chief investment strategist at BMO Capital Markets. Like fans of The X-Files, "investors 'want to believe,' but they can't buy into what's going on in Washington."

The Commerce Department said U.S. third-quarter gross domestic product growth was revised up to 2.7% from 2.0%, though much of that came on higher inventories. Final sales growth was revised down to 1.9% from 2.1%.

FROM ABOUT MAY 2012, shares of companies that generate most of their revenue here at home began to sharply outperform multinationals, which derive the bulk of revenue overseas. With Europe flat on its back and the Asian economies sputtering, the thinking was straightforward: Though slow, the U.S. economy was the best house on a bad block, so many investors clamored for exposure to domestic stocks, often through utilities, retailing, and housing, among other sectors.

That seems to have begun to change right along with the post-election rally that started Nov. 16. Since then, according to Bespoke Investment Group, the S&P 500 decile of stocks that generate all of their revenue domestically has notably underperformed stocks with lots of international revenue.

What's odd about this is that the broad rally of the past two weeks has been driven by market sentiment that the parties in Washington seemed more cooperative on avoiding the fiscal cliff.

Logically, that should have continued the domestic outperformance. If the federal government isn't able to solve its fiscal problems on a timely basis, it would be the domestic stocks suffering the brunt of the economic pain caused by higher taxes and less government spending.

More probably, investors have grown more sanguine about the global economy in general. Not that growth is returning strongly, but the latest economic surveys from the U.S., China, and Germany suggest that some of the economic clouds could be lifting. It's perhaps too early to call an inflection point, but it's worth watching.

SPINOFF DEALS HAVE BEEN HOT this year. Mergers and acquisitions have not, though Corporate America is awash with cash.

In 2012, there have been 58 spinoffs announced so far, and 30 of them have been completed, according to Joe Cornell, head of Spin-Off Advisors and a longtime veteran of the field. The 2012 spinoffs completed to date are valued at about $105 billion, higher than last year's 25 spinoffs valued at $94 billion. With the possible completion by Dec. 31 of five or 10 more of this year's announced spinoffs, the 2012 final value should be significantly higher than 2011's.

The Ralcorp split up, effected last February, is interesting for a couple of reasons. First, last Tuesday
ConAgracag 2.0169851380042463%Conagra Brands Inc.U.S.: NYSEUSD38.44
0.762.0169851380042463%
/Date(1481320949098-0600)/
Volume (Delayed 15m)
:
4464083AFTER HOURSUSD38.44
%
Volume (Delayed 15m)
:
36184
P/E Ratio
25.69346968785509Market Cap
16495173319.632
Dividend Yield
2.0811654526534857% Rev. per Employee
550804More quote details and news »caginYour ValueYour ChangeShort position
(CAG) agreed to buy Ralcorp for $4.95 billion, or $90 a share. In these pages one year ago, when the pre-spin Ralcorp traded at $79, we suggested Ralcorp's July 2011 decision to split off Post would result in two smaller companies, each potentially attractive to bigger players in their sectors.

The rationale behind spinoffs is straightforward. Typically, they are done when one or more of a company's disparate divisions don't fit with the others, and the combined market value doesn't fully reflect the value of the various businesses. It's a tax-efficient way of giving shareholders separate shares of the new company, often a pure-play stock.

The hope is that the total value of the two will be higher than the value of the pre-split company. These moves often create investments that are easier for analysts and investors to understand and that can also be attractive acquisition targets. For a pre-spinoff Ralcorp holder, the gain is $11 a share from the ConAgra offer and about $17 worth of Post Holdings shares, a 35% return from one year ago.

That's the classic spinoff motivation. But as Cornell notes, what's driving the activity higher lately is intensifying agitation by a number of big institutional shareholders—such as Pershing Square Holdings and JANA Partners—for such moves. Institutions are buying stocks and then leaning on management to create value, he says, particularly where there's an argument that the sum of the parts is greater than the whole.

Studies show that spinoffs often outperform the market over a two-to-three-year period, Cornell says. As of Thursday, the Bloomberg U.S. Spun-off Companies Index of 20 spinoffs with a total market value of at least $1 billion is up about 42% year to date. Stocks are in the market-weighted index for three years after their spinoff dates and the return noted above is for the entire portfolio, not an average return.

THE VALUATION DEBATE over the $12.63-per-share, or $1.45 billion, bid for
Orient-Express Hotels
(OEH) by a consortium led by Indian Hotels obscures a more important issue for Orient Express shareholders: the firm's Byzantine voting structure.

Holders of Orient Express' 102.9 million Class A shares effectively have no say on the transaction because each A share has one-tenth of a vote. Although the Orient Express board, which rejected the bid as too cheap, made the decision for all shareholders, 64% of the voting power at this Bermuda-based company resides with the 18 million Class B common shares, with one vote each.

Here's where it gets interesting. All Class B shares are held by Orient-Express Holdings 1 Ltd., also Bermuda-based and a wholly owned subsidiary of Orient Express Hotels itself.

Yet OE Holdings isn't obligated to follow OE Hotels' board recommendations. According to OE Hotels' latest annual filing with the U.S. Securities and Exchange Commission, under Bermuda law those B shares are voted by the four directors of OE Holdings, two of whom, John D. Campbell and Prudence M. Leith, are also directors of OE Hotels. The other two directors aren't named, but all four have fiduciary duties to OE Holdings. Also in the filing: These four directors, "should they choose to act together, will be able to control substantially all matters affecting" OE Hotels.

Those 18 million Class B shares were purchased by OE Holdings from Sea Containers in July 2002 for a penny a share, or $180,445. OE Hotels was gradually spun off from Sea Containers, beginning in 2000. In August 2002 filings covering the sale of the Class B shares, OE Hotels said, "In a takeover of OE Hotels, this share-owning subsidiary structure may assist in maximizing value OEH shareholders receive…." The B votes were upheld in a court challenge in Bermuda. This unusual structure, not allowed for U.S.-registered companies, is tantamount to a poison pill.

As for the offer from Indian Hotels, which already owns almost 7% of OE Hotels, it undervalues the hotelier despite pedestrian results in the past four years, when rivals have done better. OE Hotels operates more than 40 deluxe hotels like the Hotel Cipriani in Venice and the Copacabana Palace in Rio de Janeiro in Brazil, or about 3,150 rooms.

OE Hotels has "great assets that have been underearning," says David Burshtan, who runs the
Neuberger Berman Small Cap Growth
fund (NBSMX). Burshtan, whose fund owns A shares, values OE Hotels at $18-$20 a share, using a forward enterprise value (net debt plus market cap) ratio of 19 times earnings before interest, taxes, depreciation, and amortization (Ebidta). That was the ratio behind the previously rejected bid for OE Hotels from Tata in 2007, when the stock traded above $60.

Burshtan says he'd prefer OE Hotels to engage Tata in talks for a higher bid. The new OE Hotels CEO, John M. Scott, can improve performance, but Burshtan would rather have "$20 per share now than wait for $22 four or five years down the road." Other A shareholders probably feel the same way.

OE Hotels declined comment through an e-mailed response to Barron's.

Unfortunately for the A shareholders, it isn't a question of a higher bid, but of what the B shareholders want. OE Hotels shares closed Friday at $12.33, below the offer price.